As Ramadan this year comes to a close, Muslims in Singapore will have taken the time to discover the richness of your religion. How does Sharia or Islamic law apply to financial decisions? The answer to that concern is: Islamic banking.
Did you know that Singapore is the only non-Muslim majority country among the top 15 countries for Islamic banking? Therefore, it is not difficult for Muslims in Singapore who want the opportunity to grow your money to find options that are both effective, as well as in line with the laws of religion.
Of course, this short article cannot fully appreciate the nuances found in Islamic banking, which is not consistently practiced throughout the world. It merely attempts to give an overview of the options Muslims have in Singapore today.
What is Islamic Banking?
Islamic banking is a global financial industry that upholds Sharia principals and is in line with the ethical values of Islam. First and foremost, all transactions are interest-free. The concept of interest or “riba” is forbidden by Sharia.
Another aspect is that Islamic banks cannot invest in industries that are “haram” or not allowed in Islam. This includes pork, alcohol and pornography. Other concepts that Islamic banking rejects are “maysir” and “gharar”. Roughly translated, these refer to gambling and speculation respectively. Both these terms describe excessively risky behaviour, which may lead to the possibility of immoral practices like fraud or scams.
In short, Islamic finance prohibits speculative activities and disallows interest bearing loan facilities. Instead, it encourages profit and loss sharing and its instruments must be assets based. In that sense, Islamic banking is banking according to the ethics of Islam.
Each Islamic bank must work with a committee of distinguished scholars with experience in Islamic finance and Sharia. In consultation with and approval of these scholars, they create financial products that are free from the prohibited practices of “riba”, “maysir” and “gharar”.
In this short introduction, we’ll look at the three most common components of Islamic banking in Singapore:
- Savings Accounts
- Personal Financing
1. Savings Accounts
In Islamic law, banks are safekeepers of your money. As interest is not allowed under Islamic law, banks are not obliged to give you anything in return for being the trustee of your funds.
So when you trust the bank with your money, the bank may choose to reward you with “hibah”. Literally translated, this is a “gift” from the bank to you. Because it is a “gift”, it is a privilege given at the bank’s discretion. You, as the person depositing the money, have technically no claim on anything but your original principal amount. This means, of course that the bank can change their “hibah” rate at any time.
By the same logic, the bank has no right to deduct anything from your account for any reason. Instead, what they can do is charge you directly. For example, there might be an “administrative charge” for your account that is conveniently waived if your minimum balance exceeds a certain amount.
Also, since you cannot be charged interest, there technically should be no overdraft facility for current accounts. Instead, banks like Maybank charge a “compensation fee” of 1% per annum should your account be overdrawn.
2. Personal Financing
Loans in Islamic banking are essentially a hire purchase transaction.
So instead of getting an auto loan from an Islamic bank and paying them interest, what happens is the bank buys a portion of your car. You then buy your car from the bank by paying the bank in monthly instalments. You either buy it back at a higher price or “murabaha”, or pay back the purchase price along with the rent or “ijara”. It’s basically the same thing as a conventional loan, but technically there’s no interest involved.
What sets Islamic loans apart is that there ideally shouldn’t be any extra or hidden costs. Both you and the bank are made aware of how much the bank is charging right from the beginning.
3. Islamic Investing
Sharia is not only about things that are haram, but also things that are halal. Sharia-compliant Islamic banking encourages profit and loss sharing and assets-based investments. Here are some ways you can grow your money without relying on interest.
Islamic Term Deposit
In conventional fixed deposits, a bank gives you interest for depositing a sum of money with them for a specified period of time. Because that system involves “riba” or interest, it is haram. How Islamic Term Deposits work is that you buy commodities from the Islamic bank. Using the Sharia principle of “murabaha” or marked-up sale, you then sell those commodities back to the bank after a period of time, for a profit.
Interestingly, in the case of Maybank’s Singapore Dollar Term Deposit-I, those profits are given to you upfront, instead of at maturity. In other words, the profit is determined as soon as you give Maybank your money, and you get it on the next business day.
For example, a Term Deposit of $25,000 of two years will get you 1.00% per annum profit (or 1.25% if you’re aged 55 and above) . So if you have $25,000 that you’re probably not going to use for two years, consider bringing it to a Maybank branch. Open a Term Deposit account and the next business day, they’ll credit $500 into your account. Just like that.
Sukuk are essentially “Islamic bonds”. Unlike conventional bonds, which are essentially loans with interest, sukuk has no debt and debtor relationship. You are not lending money, you are buying shares in an asset. Your income is not from the interest on a loan, but from profit generated by the asset and from any rental payments made by the issuer.
Several corporations have established sukuk programmes in Singapore, including Sabana REIT, which is the world’s largest listed Sharia-compliant real estate investment trust by total assets. Another option is the HSBC Insurance Ethical Global Sukuk Fund. For Muslims concerned about investing into Sharia-compliant financial products, both of these sukuk programmes are endorsed by independent Sharia committees.
Do you have any other questions about Islamic banking? Let us know.
Image Credit: Erwin Soo
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